What Are Bitcoin Futures?

Nikolay Korinets

Our series of educational materials on cryptocurrency continues, and in this text Mercuryo will explain what Bitcoin futures are and tell about the major events surrounding this topic.

Our series of educational materials on cryptocurrency continues, and in this text Mercuryo will explain what Bitcoin futures are and tell about the major events surrounding this topic.

Futures (or futures contracts) in general allow to buy and sell assets or currencies at a specific time in the future. This greatly helps market players who want to work with volatile assets without any unforeseen events. For instance, an individual investor wants to sell his Bitcoin funds for $7000 a year later, and a corresponding futures contract gives an opportunity to do so while not bothering about the price dynamics. Somebody else may want to buy Bitcoin at a price of $5000 several months after the contract is created — and again, no price fluctuation can influence the sum stated in the contract. The main advantage of Bitcoin futures in comparison to regular Bitcoin trading is that futures, being only derivative contracts with Bitcoin as an underlying asset, are available to a wider range of investors.

Futures contracts for Bitcoin appeared in 2017, when the hype around cryptocurrencies was at its peak. That year, market observers waited for the launch of futures on two major traditional exchanges — the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME Group).

CBOE was the first exchange to launch Bitcoin futures on December 10, 2017. At the time, the price of Bitcoin has jumped from $14,500 to $16,970 which was immediately connected to the event by news reporters. CME Group followed CBOE on December 18. The launch on CBOE was commented by its head Edward TIlly: 

“If Jamie Dimon would like to take the other side of our long, that’s great. We’ll provide a marketplace for him to do so.” 

It was a reference to JPMorgan Chase CEO Jamie Dimon’s negative opinion on the most capitalized cryptocurrency. When you want to ‘long’ an asset, you buy it (often to sell later), and when you ‘short’ an asset, it’s vice versa – you sell it.

What was the key difference between CME and CBOE futures? The source of Bitcoin price. The contracts offered by CBOE used reference prices from Gemini, a cryptocurrency exchange owned by the Winklevoss brothers, a prominent entrepreneurial duo. On the other hand, CME futures used six different cryptocurrency exchanges at the time of introduction. 

For a large part of crypto investors, futures on CME and CBOE made it seem that now Bitcoin will only continue to grow. This, however, did not happen and the infamous price collapse at the beginning of 2018 might be connected to Bitcoin futures too. This interpretation was suggested by the Federal Reserve Bank of San Francisco (FRBSF) in a report dating back to May 2018. Experts conclude that the launch of Bitcoin futures actually gave a leverage for bears – traders who believed Bitcoin’s price is over-exaggerated. Turns out Jamie Dimon wasn’t the only one who would short Bitcoin after all.

Despite this alleged negative influence and the closure of BTC futures contracts on CBOE in March 2019, recent reports tell that the aggregated open interest (OI) for Bitcoin futures has surpassed $5 billion on February 13, 2020. As seen from the motion at the time of writing (February 2020), the price of Bitcoin can be relatively high even when the opportunities to bet on its downfall are available. Another exchange where you can have a Bitcoin purchase or a sale at a specific time in the future is Bakkt, a platform subsidiary of the Intercontinental Exchange which owns the New York Stock Exchange. Large crypto exchanges OKEx and BitMEX have also added Bitcoin futures to their list of trading opportunities. NASDAQ, perhaps the world’s most famous exchange, was reported to review the same idea in the past.

Crypto derivatives are now a new normal and are likely to fulfill the needs of many conservative investors who will under any circumstances not go outside regulated exchanges. For this reason, it would not be right to assume that there is no need for derivatives when you can trade Bitcoin directly. The launch of Bitcoin futures on more platforms may eventually result in a more balanced market where bullish traders who pump up the price are not prevailing over bears. This, in turn, will make Bitcoin less volatile and it will become what it’s anonymous creator envisioned in the first place – a cross-border payment tool.

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